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Michael Luddy

Lawrence Gu

Mark Deluzio

The Goodyear Tire and Rubber Company (NYSE:GT) is a vertically integrated developer, manufacturer and distributor of tires with 96 manufacturing facilities in 28 countries. During FY2008, Goodyear posted net sales of $19,488 million.

On September 18, 2009, Goodyear signed a four-year master labor contract pertaining to Goodyear's tire production in seven North American plants that was ratified by members of the United Steelworkers Union (USW). The new contract builds on changes made after the post-2006 strikes agreements. The 2009 contract attempts to increased productivity in how Goodyear's plants are run, lower Goodyear's overall cost structure in regards to its wage and benefit savings, and increase flexibility so Goodyear can respond to changes in market conditions.^[1] The new contract are expected to provide Goodyear with cost savings of approximately $215 million over the term of the four-year contract.^[1]

Goodyear has shifted its focus to pricing from volume in the past few years. This was very noticeable in the FY2008 numbers. Despite the fact that tire sales volume fell 12.5% in the the U.S. and 5.8% abroad, revenue only fell by 0.7%.^[2] Pricing increases are being passed to the consumer in favor of increasing sales volume. This strategy is working both domestically and internationally because of weak dollar's effect on imports. The dollar rose 4.8% in value relative to the euro during 2008 but remained weak at the end of 2008, trading at $1.40 per euro.^[3]

Company Overview

Q3 FY2009 Summary

Goodyear recorded its first profit for the first time in nine months for the third reporting quarter of FY2009; earnings more than doubled to $72 million this quarter compared to third quarter FY2008.^[4] Goodyear's third quarter FY2009 sales were $4.4 billion, down 15% from FY2008 third quarter sales, but an 11% increase compared to FY2009 second quarter.^[5] Goodyear associates these increases from reducing expenses by cutting output, shifting production to lower-cost plants (lower raw material costs of $105 million), and eliminating about 5,800 jobs this fiscal year, which include 300 jobs this quarter.^[6] Furthermore, Goodyear launched 15 new product this quarter, which has partially contributed to its increased earnings.^[7]

Despite improved third quarter earnings, GT's stock price dropped over 20% after Goodyear forecast an operating loss of $75 million to $125 million in North American in the fourth quarter.^[8] The cause of the concern is that GT's North American business is the company's largest region by revenue.

Business Segments

Goodyear's FY2008 and FY2007 Tire Sales by region and tire type^[9]

Original Equipment Tires (27.3% of FY2008 Total Tire Sales)

OE Tires are new tires bought by manufactures to fit the specific needs of its vehicles. Within this category, Goodyear produces produces tires for passenger cars, light trucks, trucks and specialty vehicles. OE tire sales decreased by 15.7% in FY2008 compared to FY2007. The decrease in OE tire sales were mostly affected by operations in North American Tire (U.S. and Canada), where OE tire sales decreased by 22.9% compared to FY2008.^[9] The decrease was led by recessionary economic conditions resulting in lower demand for new vehicles.

Replacement Tires (72.7% of FY2008 Total Tire Sales)

Replacement Tires consist of tires bought by consumers to replace the tires on their vehicles. Replacement tire sales decreased by 5.5% in FY2008 compared to FY2007.^[9] Replacement Tire sales decreases were also led by recessionary economic conditions, but were less impacted due to less impact from the new vehicle industry.

Key Trends and Forces

Despite the Use of Derivatives, Fluctuating Raw Material Costs Hamper GT's Profitability

Together oil derivatives, in particular naptha, and natural rubber, account for about 88% (60% oil derivatives and 28% rubber) of a tire's raw material composition. Oil Prices have tripled and rubber prices have quadrupled in the past 3 ½ years. Natural rubber prices have been driven up by an increasing demand from China and poor weather conditions. Continued demand from China and a slow recovery of the rubber industry could keep rubber prices elevated and put pressure on Goodyear's profits.

Higher oil prices also mean higher gas prices, causing a decrease in Goodyear's original equipment (OE) tire sales. Higher gas and utility costs also slowed tire industry growth by decreasing income power for the low and middle income families. If oil prices decrease, then Goodyear could see greater profits and better industry growth.

Because a Weak Dollar Discourages Imports from Abroad, a Weak Dollar Drives Profits for GT

A CRT Capital Group analyst has called Goodyear "...poster child for people that benefit from a weak dollar."^[10] This is true for two main reasons: decreased imports and improved currency effect on foreign sales. A weak dollar will greatly discourage imports from abroad. The pricing advantage of foreign firms that comes from cheap labor has been offset recently by the increase in their exchange rates and increase in dry bulk shipping rates. Since 61.7% of Goodyear's FY2008 Replacement Unit sales and 60.9% of Goodyear's FY2008 Original Equipment Unit Sales came from "International", a weaker dollar benefits their bottom line in absolute terms.^[11] These incoming cash flows will increase in nominal terms because of the foreign currency appreciation.

Goodyear's Sales are Highly Dependent upon International Operations

The North American Tire Segment made up about 38.5% of Goodyear's sales in FY2008.^[12]GT FY2008 Annual Report, Pg 22</ref> In the recent years, Goodyear's sales have increasing become more and more dependent on its International operations. This is partly because Goodyear's operations in North America continuously have low or negative operating margins. In FY2008, for example, GT's "North America Tire" had an operating margin if -1.9%.^[12] This figure, compared to GT's "Latin American Tire" segment's operating margin of 17.6% in FY2008, is drastically different.^[13] Note though that "Latin American Tire" results are highly dependent upon sales in Brazil, which accounted for 52% of the segment's net sales in FY2008.^[13] In "Asia Pacific Tire," operating margins have continuously increased from 8.9% to 9.2% in FY2007 and FY2008, respectively.^[14] Although in China, there are only 12 passenger cars per 1000 inhabitants compared 500 passenger cars per 1000 inhabitants in Western Europe, the number of car owners in China have been drastically increasing. These figures are consistent with other BRIC countries, which shows how since both Asia and Latin America have high growth potential, their development highly impacts Goodyear’s revenues.

Competition

Goodyear's top competitors are Michelin and Bridgestone. Goodyear is the third largest by market share behind Bridgestone and the leader Michelin. Both competitors are based overseas, Michelin in France and Bridgestone in Japan. Michelin is the leading producer in Europe and also is the leading producer in China. Bridgestone is the leading producer in Japan. Michellin, has a less favorable cost base than Goodyear but can charge higher prices due its superior technology. Through Bridgestone's combination of marketing and product mix it has been able to increase its sales dramatically in comparison to its competitors while charging higher prices.